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NOVICE TRADER SERIES
Editor,It's a great idea that STOCKS & COMMODITIES includes the Novice Trader articles. You will surely gain more new readers with the series while not losing the current ones. I'd like to suggest that in your future issues, you may want to present such topics as Fibonacci, Elliott wave, and Dow theory basics.
I'm not a security- or investment-related professional, but I like to trade. Being a daytrader is out of the question for me, but I want to catch intermediate up- and downtrends. Can you recommend software that is not too costly and that has good charting capabilities and indicators for weekly (not daily or monthly) stock and index trends?
Thanks for your suggestions. Regarding our novice articles, we have recently added a Staff Writer, which will allow us to run more of the articles like the ones you mention. With regard to software, we publish product reviews each month. In addition, our 1999 Bonus Issue, available only to subscribers, contains our Readers' Choice Awards for favorite technical analysis software, and our Website contains the Software Comparison Table, which details software features. We can't recommend individual products to each of our readers because everyone's needs and budgets are different, but we try to provide as much information as we can to help you narrow down your choices. --EditorRichard Zhu
COMPUTING THE S&P 500
Editor,In the January 1999 STOCKS & COMMODITIES, a letter was published asking how to compute the S&P 500. I can provide an answer, but itÕs not so simple. First, go to the Chicago Board Options Exchange's Website at https://www.cboe.com/products/indxcomp/s&p500.htm and download the complete listing of S&P 500 stocks and their weightings in the S&P 500. You can get it conveniently in text or spreadsheet format. Once you do this, you then multiply the current price of each of the 500 stocks by the number of shares listed for each, sum the total, then divide by a constant to get the index value. Of course, I don't know why anyone would want to go to the trouble of doing all of this when so many data services already provide this information. By the way, the same Website offers similar information on several other major indices on which the Cboe offers options.
Thank you for writing, Tom. For our newer readers, Sherman, Marian, and Tom McClellan, who are known for the McClellan oscillator, were interviewed in STOCKS & COMMODITIES in June 1994. -- EditorTom McClellan , via E-mail
A WORD FROM A DATA VENDOR
Editor,In the January 1999 S&C, John Sweeney's product review of Option Simulator/RT contained a sidebar on datafeed limitations that we think warrants comment. While it is true that many data vendors drop data, filter data or delay transmission of data until bandwidth is available, this practice is not merely limited to Internet delivery. It also happens with many satellite or leased-line data vendors as well. A side-by-side comparison among data services shows the differences among datafeeds. You may count Data Transmission Network (DTN) as one vendor that does not practice any form of data filtering, data exclusion or delaying transmission for any of our information services. As for Internet delivery, we are committed to providing sufficient bandwidth for our customers so that it is not "inevitably ... overloaded."
Barbara Keefe Director
Marketing & Advertising Dtn Financial Services Data Transmission Network Corp.
ANOTHER WORD FROM A DATA VENDOR
Editor,I was amazed and disappointed to find that CSI was left off your 1998 Readers' Choice Awards ballot in two categories in which we actively do business. In the category of data downloading software, you show our product Quicktrieve, but you left off Unfair Advantage. In the historical data category, CSI was left out. Fortunately, you did list us for the futures, stock, mutual fund, and options data categories, for which we are grateful.
We apologize for failing to list some of your products in some of our Readers' Choice categories on the ballots that went out to subscribers last August, from which our Readers' Choice Awards are compiled for our Bonus Issue. Thank you for letting us know. -- EditorBob Pelletier Commodity Systems, Inc.
DISCOUNT BROKERS
Editor,What a great Website you have! I am a novice trader and a loyal reader of S&C. I have recently retired from 35 years in the supplier side of the automotive industry and will be making a living trading commodities full-time. What sort of extra help should I expect from a full-service broker versus a discount house that only takes my orders? I currently pay $50 for a roundturn.
To trade cotton this week, I will use the pointers I picked up from Barbara Star's December 1998 article "The MACD Profit Alert." Thank you for all the help getting started.
The differences between a full-service broker and a discount brokerage can range considerably. However, since the dawn of the discount brokerage age, the two brokerage types have moved closer to each other in style, with the full services slowly lowering commissions and the discount houses adding free research and other amenities.Al Werth, via E-mailYou should research what services are offered at various prices, then find a match based on your needs. The key issue in trading commodities has more to do with your trading method than which brokerage you use: Find a strategy with a profitable track record, either your own strategy or one that someone else has developed, and follow it. -- Editor
WINDOW ON WALLSTREET
Editor,I am a new subscriber to your magazine and enjoy it very much. A lot of it is over my head, but I still find interesting and useful articles. I was wondering if you could start including Traders' Tips for Window on WallStreet. In addition, do you know of anyone who offers trading systems for Window on WallStreet? Keep up the good work.
Window on WallStreet has contributed Traders' Tips to our magazine several times in the past year, and we hope they will continue to offer tips to us for publication. For trading systems, check out the new Software Comparison Table at our Website, https://www.traders.com, check the ads and classified ads in our magazine, and check with Window on WallStreet regarding third-party vendors. Thanks for writing. -- EditorDenise Mense, via E-mail
REVERSAL FORMATIONS
Editor,I found Alex Saitta's article "Reversal Formations: Predictive Power"(STOCKS & COMMODITIES, November 1998) interesting. I am curious to know if Saitta could or did test to see how profitable it was to stop and reverse, in particular on the double top/bottom trades. As these formations define key levels of what the market perceives as value, it would be interesting to know the effect of the breakout beyond such levels.
Perhaps this is something you would like to test and report on. If the desire should strike you, feel free to request a copy of our Author Guidelines. We hope to hear from you. -- EditorPhilip Nixon, via E-mail
NEW TECHNICAL ANALYSIS INDICATORS
Editor,After visiting your Website, I still don't know where I can find any information about the newest technical analysis indicators. Can you tell me where to find out about these?
In STOCKS & COMMODITIES, we try each month to publish articles on new indicators, explore new uses for existing ones, and revisit classic indicators. In fact, many technical analysis indicators have made their debut in our pages over the years, thanks to our dedicated authors and contributors whose patient work and study developed into practical applications for technical analysis. In addition to our articles, you could try checking the Books for Traders section of our magazine each month for recent book releases on indicators and trading. Finally, look at the technical analysis software offered by the various software vendors for proprietary or newly coded indicators. -- EditorPaul Liu, via E-mail
USEFUL ARTICLES
Editor,I have subscribed to STOCKS & COMMODITIES for about six months now, and itÕs an excellent magazine for me. I have been seriously trading stocks and mutual funds this past year using TradeStation, and your articles are very useful, since I learn how to design successful trading systems and how to use technical indicators. Keep up the good work.
Stan Plaisier, via E-mail
LONG-TERM TECHNICAL INDICATORS
Editor,I recently visited your Website for the first time. I like it. Of the magazines I've read on trading, yours is my favorite reading and source of new ideas. In my trading, which is in time frames of two to 10 weeks, I use mostly technical analysis. I use a set of garden-variety indicators, from RSI to volatility. My question is, how should I interpret multimonth and yearly trendline breaks in many of the indicators (RSI, ROC, stochastics, and so on) and multimonth and yearly lows in other indicators (such as MACD)?
Before you can interpret indicators, it's important to understand the calculations behind them and thus the potential implications. For example, RSI measures momentum by measuring the differences between closing prices. When the RSI turns down and breaks an uptrend line, it can indicate that the trend of momentum is down. Likewise, the MACD measures differences, but instead of using closing prices, the MACD looks at moving averages. Seeing a downturn in either indicator would be a negative sign. But more important, review your market history and develop guidelines to remind yourself what each indicator was designed to indicate. -- EditorZoran Gnjidic, via E-mail
UPDATING BOLLINGER BANDS
Editor,The efficient market hypothesis states that the market price of a stock immediately reflects knowledge on the part of investors of all available fundamental information regarding a company. Consequently, stock prices fluctuate chaotically. For this reason, it is generally assumed by scholars that technical analysis of stocks and commodities is useless and that it is impossible to time market transactions for consistent profits. Both assumptions are incorrect!
From its chaotic quality, one might assume that the distribution of a stock's closing prices is roughly Gaussian, or normal, about a moving average value. Although this assumption is not necessary, it provides a simple way to estimate an appropriate averaging time for market transaction purposes.
Suppose a line is constructed above and below the moving average at a distance two moving standard deviations from the average. The bandwidth between these lines is time-dependent. For a normal distribution, 4.55% of the data lies outside the band formed by the standard deviation lines. Therefore, one data point must fall outside the band every 20 days or so. Generally, the price will bounce between the boundaries of the band, since the nature of the distribution necessitates it. Purchases can be made when the price falls below the band; sales, when the price falls above the band.
This basic procedure was apparently first used by investment manager John Bollinger about 25 years ago. In the investment community, these bands have come to be called Bollinger bands. Sometimes, on consecutive occasions, the stock will penetrate the same boundary. This may represent a loss, rather than a profit. To minimize this possibility, confirming indicators can be constructed. The price velocity, that is, the rate of change of the price, with its associated two-standard-deviation envelope, is appropriate. This is generally a leading indicator because the price velocity must be extreme prior to, or coincident with, the price extreme. The penetration of the price velocity through its standard deviation boundaries, as well as the divergence of its successive extreme values relative to successive price extremes, make it a dual indicator -- that is, both phenomena are indicators. Finally, the price acceleration -- that is, the rate of change of the price velocity and its two-standard-deviation envelope -- is also useful.
The price velocity and the price acceleration indicators are each calculated for short time periods, say 10 days with two-day rates.
Although I have merely updated an old trading technique, the point I wish to make is the ironic one that, in contradiction to expectations, the efficient market hypothesis leads to a highly profitable market timing system with a sound theoretical basis. This does not appear to have been recognized previously.
Thank you for sharing your ideas. Readers wishing to review or are curious about Bollinger bands should turn to page 18 of this issue for an article on the subject. -- EditorWalton Howes, via E-mail
TIDE OF THE CENTURY
Editor,I was wondering if there has been anything written on a method called the tide. It is my understanding that this method was announced in 1996 as the "discovery of the century" for every technical trader.
Apparently, it is a method that counts the swings (rotations) of any market to predict when and where the next rotations will occur, being up or down and for how long these swings should take place. The method works on a fixed ratio of swing counts. The rotations work on a basis of market swings per time frame of three hoursÕ trading.
We have not published anything on the tide method. However, we would caution anyone about purchasing products that make extraordinary claims; generally speaking, if something sounds too good to be true, it usually is, and I know that in trading, there is no Holy Grail. -- EditorA. Carter, via E-mail
CHAOS THEORY
Editor,I was disappointed not to find my name given as a reference on chaos in your response to Percy Lamb's question in your November 1998 Letters column. Every Friday I give free lessons on trading chaos at my Website at https://www.cashinonchaos.com/hans. You also reviewed my Cash In On Chaos course, and I have published several article on chaos in STOCKS & COMMODITIES.
On another topic, I really enjoyed the interview with Courtney Smith (STOCKS & COMMODITIES, November 1998), with whom I have spoken. I agree with much of what he says, except for his statements about daytraders. He seems to imply that daytraders are emotional weaklings who don't know how to use discipline! He may not like that style of trading, but it permits very tight control on losses, unlike position trading, where overnight events can cause large uncontrolled losses.
Those large uncontrolled losses are why position traders may need the $200,000 startup funds that Courtney recommends. But that's out of reach for the average new trader. Furthermore, some of the new contracts, such as the E-mini and the Dow Jones futures, do not require nearly that much capital.
Trading does require strict discipline, which can be used just as easily by a daytrader as by a position trader. It's just that daytrading reveals the lack of discipline faster.
I would love to write an article about making up a daytrading plan and trading it, if you are interested.
Thank you for your comments and for your interest in submitting an article! We apologize for failing to list your articles. (Sometimes, if the keyword is not in the title, we can miss it in our text search.) For our newer readers, Hans Hannula contributed a number of articles to S&C between 1987 and 1996, and we looked at his Cash In On Chaos course in a Quick-Scan in 1994. -- EditorHans Hannula, via E-mail
MACD CALCULATION
Editor,I read "The MACD Profit Alert" in your December 1998 issue with great interest because it described a very simple but reassuring technique for indicating when action should be taken.
I gathered data on three different securities to test the hypothesis. On the first two securities tested, I could not recreate indicators that would alert me to a pattern. I assumed something was incorrect in my formulas, so I used data covering the same periods as those used in the article. Once again, I could not replicate the MACD and histogram.
I tried two methods for calculating the MACD. One was taken from the Industrial Engineering Handbook, which calculated an n-period moving average (26-, 12-, nine-day) for the EMAD-1 component. The other method was to use the formula given in your Traders' Glossary with the appropriate (26-, 12-, nine-day) moving averages calculated after the EMAS. In all cases, I could not replicate the patterns. Could you provide a more detailed explanation on how the calculations are performed?
Barbara Star used Equis International's technical analysis software MetaStock to perform her research. To see how Meta-Stock calculates the indicators, go to Equis's Website at https://www.equis.com and view Technical Analysis From A To Z, which was written by Steven B. Achelis, president of Equis International. You should find the answer there.-- EditorEdward Nove, via E-mail
YEN, RECURSED
Editor,I would like to compliment you and author Dennis Meyers for "The Yen, Recursed" in your December 1998 S&C. It was innovative, clear, and comprehensive.
One notation change might help the reader understand the mathematical discussion. Equation 7 on page 35 shows the price forecast that is obtained using the trend model. It is for the period (t+1), one day ahead.
The exponentially weighted moving average finds the best constant level using all the data available through time t to forecast the price in (t+1). Thus, the constant level model generates its forecast for the same period (t+1) as the trend model, and so, to be consistent, the forecast estimate in Equation 5 should be denoted XOest(t+1). Then, subtracting the constant price forecast from the trend price forecast yields an estimate of the trend, or the price change expected in the next period.
On page 41, Meyers mentions five criteria that he used in optimization. Could he expand on how he optimized? Did he maximize a weighted average of all five criteria, optimize on one criteria with four constraints, or use some other approach?
TradeStation optimizes using profitability and provides a matrix displaying other pertinent information, such as maximum drawdown and more. -- EditorThank you. Charles C. Holt, Ph.D.
Austin, TX
NEW TC2000 USERS GROUP
Editor,I'm a subscriber to STOCKS & COMMODITIES I thought you might like to inform your readers that a TeleChart 2000 users group has been formed and can be reached at https://clubs.yahoo.com/clubs/telechart2000usergroup. Thanks for your consideration.
Thanks for sharing that information.-- EditorWalter Schaffhauser, via E-mail